EU pensions regulation could inhibit long-term investments, an independent report commissioned by the Labour Party has found.

It said that issues relating to EU’s Solvency II and assets could result in “a bias against long-term investments”.

It warned: “Where liabilities will crystallise only after many years, it is clearly sensible to invest in assets of similar duration. However, in the interim, say over a one-year period, there may well be volatility in asset prices, even though in the long term it could reasonably be expected that these changes will reverse.

“This creates artificial volatility for regulatory solvency purposes with a consequent increase in required capital. This results in a bias against long-term investment and an increase in the cost of provision of the long-term savings products.”

However it added: “Efforts are currently underway to reduce this adverse impact on longdated insurance business through application of a ‘matching adjustment’ where credit will be given for having fixed interest-type assets with cash flows that replicate the projected liability cash flows.”

The report also cited The Pensions Regulator and the Pension Protection Fund as having had a major impact on schemes’ investment strategies, which has led, in many cases, to a requirement to make high contribution to reduce deficits, calculated on snapshots within the economic cycle. This is on top of the existing pressures on pension schemes from accounting changes, it added.

The findings are part of a wider review into the effect of short-termism among businesses. It concluded that short-termism constrains the ambition of UK businesses and the country’s equities markets needs to be improved.

The report drew views from business leaders, investors, trade unionists, past heads of government departments and representative bodies, and also reflects feedback from a survey conducted by Institute of Directors (IoD).

Responding to the report, the National Association of Pension Funds governance adviser Will Pomroy said: “We welcome the recognition that regulation has increasingly driven pension funds and their sponsoring employers to take a shorter term view. We need a regulatory environment that is more supportive of longer term risk-taking by pension fund investors.”

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